Credit Facility, Convertible Notes and Common Stock Warrants | 6 Months Ended |
Jun. 30, 2014 |
Debt Disclosure [Abstract] | ' |
Long-term Debt [Text Block] | ' |
5 | Credit Facility, Convertible Notes and Common Stock Warrants | | | | | | | | | | | |
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Credit Facility with Hercules Technology Growth Capital, Inc. |
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On December 3, 2013 (the “Credit Facility Closing Date”), we obtained a credit facility of up to $15.0 million (the “Credit Facility”) from Hercules Technology Growth Capital, Inc., a Maryland corporation (“Hercules”). The Credit Facility is governed by a loan and security agreement, dated December 3, 2013 (the “Loan Agreement”), which provides for up to three separate advances, with the first advance of $7.5 million available at closing. The availability of the second advance of $2.5 million was dependent upon our achieving $6.0 million in gross commercial revenue for the fourth quarter of our 2013 fiscal year. The availability of the third advance of $5.0 million was dependent upon our achieving $7.0 million in gross commercial revenue for the first quarter of our 2014 fiscal year and net proceeds of at least $15.0 million from sales of our equity securities on or before June 15, 2014. We did not achieve the requirements to draw the second or third advances. |
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The following table presents the components of the Credit Facility (in thousands): |
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| | June 30, | | December 31, | | | | | | |
2014 | 2013 | | | | | |
Advance | | $ | 7,500 | | $ | 7,500 | | | | | | |
Final payment | | | 263 | | | 263 | | | | | | |
Debt discounts, including common stock warrant | | | -780 | | | -932 | | | | | | |
Total long-term debt | | | 6,983 | | | 6,831 | | | | | | |
Less: Current portion of long-term debt | | | -1,940 | | | -563 | | | | | | |
Total long-term debt, net of current portion | | $ | 5,043 | | $ | 6,268 | | | | | | |
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The Credit Facility has a term of 39 months and accrues interest at a rate equal to the prime rate plus 7.75% (with the prime rate subject to a floor of 4.75%), calculated on an actual/360 basis and payable monthly in arrears. Amounts outstanding during an event of default accrue interest at a rate of 3% in excess of the above rate, and past due amounts are subject to a 5% late charge. Outstanding principal will amortize in the 30-month period preceding maturity, payable in equal installments of principal and interest (subject to recalculation upon a change in prime rates). Any advance may be prepaid in whole or in part at any time, subject to a prepayment fee of 1-2% if prepaid more than one year after closing. In addition, a fee equal to 3.50% of all advances made under the Credit Facility will be payable upon the final principal payment or prepayment in full of the advances. The Credit Facility is secured by a lien on substantially all of our assets. |
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The Loan Agreement contains customary covenants and representations, including a financial reporting covenant and limitations on cash dividends, distributions, debt, contingent obligations, liens, loans, investments, mergers, acquisitions, divestitures, subsidiaries, and changes in control. We are not allowed to declare or pay any cash dividends or make cash distributions on any class of stock or other equity interest, except that our subsidiary may pay dividends or make distributions up to Baxano Surgical. There are no financial covenants. Prior to the maturity of the Credit Facility, Hercules will also have the right to participate on the same terms as other participants in certain types of our broadly marketed equity financings. |
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The events of default under the Loan Agreement include, without limitation, (1) a material adverse change in our ability to perform our obligations under the Loan Agreement, or in the value of our collateral, and (2) an event of default under any other of our indebtedness in excess of $150,000. If an event of default occurs, Hercules is entitled to take enforcement action, including acceleration of amounts due under the Loan Agreement. The Loan Agreement also contains other customary provisions, such as expense reimbursement and confidentiality. Hercules has indemnification rights and the right to assign the Credit Facility. |
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The estimated fair value of the debt (categorized as a Level 2 liability for fair value measurement purposes) is determined using current market factors and our ability to obtain debt at comparable terms to those that are currently in place. We believe the estimated fair value at June 30, 2014 and December 31, 2013 approximates the carrying amount. |
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In connection with the Credit Facility, we issued to Hercules a warrant to purchase shares of our common stock (the “Warrant”). The Warrant consists of two tranches, the first tranche issued at closing and the second tranche to be issued if and when Hercules makes a second advance under the Loan Agreement. The first tranche is exercisable for a number of shares of our common stock equal to $900,000 divided by the exercise price. The second tranche is exercisable for a number of shares of our common stock equal to $300,000 divided by the exercise price. We did not achieve the requirements to draw the second or third advances under the Loan Agreement and, therefore, the second tranche of the Warrant has not been issued. The exercise price is $1.02 per share initially, but is subject to downward adjustment upon our consummation of a financing at a lower effective price per share during the one-year period following the Credit Facility Closing Date. The aggregate number of shares issuable upon exercise is limited to 1,176,471. The Warrant is exercisable by Hercules in whole or in part, at any time, or from time to time, prior to the fifth anniversary of the Credit Facility Closing Date. The Warrant will be exercised automatically on a net issuance basis if not exercised prior to the expiration date. |
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The Warrant is considered a mark-to-market liability which is re-measured to fair value at each reporting period due to a provision whereby the exercise price of the Warrant could be decreased if we had a subsequent issue of equity instruments at a price less than $1.02 per share. We will be required to mark-to-market the fair value of the warrant liability each reporting period over the warrants term. At December 3, 2013, we recorded as a liability the initial Warrant tranche for 882,353 shares of our common stock at an estimated fair value of approximately $0.7 million with an offset to debt discount. The debt discount associated with the initial value of the Warrant is being amortized to interest expense over the term of the Credit Facility. |
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Convertible Notes |
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On March 11, 2014, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain institutional investors (the “Purchasers”) whereby we agreed to sell approximately $10.0 million in aggregate principal amount of subordinated convertible debentures (the “Convertible Notes”), together with warrants (the “Convertible Warrants”) to purchase 9,428,000 shares of our Common Stock in a private placement transaction (the “Private Placement Transaction”). The closing of the full amount of securities in the Private Placement Transaction was subject to stockholder approval, which was attained at our 2014 annual meeting of stockholders on April 17, 2014. The Private Placement closed on April 22, 2014 (the “Private Placement Closing Date”). |
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Convertible notes as of June 30, 2014 consisted of the following (in thousands): |
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Principal | | $ | 9,994 | | | | | | | | | |
Discounts, including common stock warrant and embedded derivative | | | -4,524 | | | | | | | | | |
Total long-term debt | | | 5,470 | | | | | | | | | |
Less: Current portion of convertible notes | | | - | | | | | | | | | |
Total convertible notes, net of current portion | | $ | 5,470 | | | | | | | | | |
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The three-year Convertible Notes will be convertible into shares of Common Stock at an initial conversion price of $1.06 per share, for an aggregate of approximately 9,428,000 shares of Common Stock. The Convertible Notes bear interest at a rate of 6% per annum, payable monthly in cash or, at our discretion provided certain conditions (“Equity Conditions”) are met each payment period, in shares of Common Stock at a price equal to 90% of a calculated market price per share. In connection with the purchase of the Convertible Notes, the selling stockholders received five-year Convertible Warrants to purchase an aggregate of approximately 9,428,000 shares of Common Stock, which were exercisable immediately upon issuance at an exercise price of $1.19 per share. |
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The Convertible Notes are subordinated to the Credit Facility and pursuant to a subordination agreement with Hercules (the “Subordination Agreement”), cash payments by us to the Purchasers under the transaction documents related to the Private Placement Transaction are subject to a $1.5 million cap for so long as the Credit Facility remains outstanding (with any amounts in excess of that cap to be held in abeyance for the Purchasers until the Credit Facility is no longer outstanding). In connection with obtaining Hercules’ consent for the Private Placement Transaction, we paid Hercules a one-time non-refundable cash facility fee in the amount of $300,000. The Convertible Notes also contain certain cross default provisions with respect to the Credit Facility. The Convertible Notes contain no financial covenants. The Convertible Notes contain customary debt instrument covenants. Upon the occurrence of an “Event of Default,” the interest rate on the Convertible Notes increases to 15% and we can be required to redeem the Convertible Notes in whole or in part in cash at 110% of the outstanding balance. |
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For one year after the date of issuance, the conversion price of the Convertible Notes and the exercise price of the Convertible Warrants are subject to adjustment upon the issuance of any Common Stock or securities convertible into Common Stock below the then-existing conversion or exercise price, as applicable, subject to certain exceptions. In the event of certain change in control transactions, the holders of the Convertible Notes and Convertible Warrants will be entitled to (i) receive upon conversion or exercise the same kind and amount of securities, cash or property which the holders would have received had they converted or exercised their Convertible Notes or Convertible Warrants, as applicable, immediately prior to such transaction; and (ii) have their securities assumed by the surviving entity. In addition, if such a transaction involves cash consideration, is a going private transaction, or involves securities not listed on the NYSE or NASDAQ, the holders of the Convertible Warrants will be entitled to have their Convertible Warrants repurchased at a calculated Black-Scholes value of such Convertible Warrants at any time within 60 days after the transaction. Subject to limited exceptions, the Company will not permit the conversion of the Convertible Notes or exercise of the Convertible Warrants of any Purchaser, if after such conversion or exercise such Purchaser would beneficially own more than 4.99% of the outstanding shares of Common Stock subject to adjustment of 9.99% with 60 days’ notice by the Purchasers. |
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We accounted for the Convertible Notes as an instrument that has the characteristics of a debt host contract containing several embedded derivative features that would require bifurcation and separate accounting as a derivative instrument pursuant to the provisions of ASC 815. We elected not to use the fair value option to account for the Convertible Notes and embedded derivatives as one hybrid instrument. We accounted for the derivative and warrants as liabilities due to certain adjustment provisions, which requires that they be recorded at fair value. The derivative and warrant liabilities are subject to revaluation at each balance sheet date and any change in fair value will be recorded as a change in fair value in non-operating items until the earlier of expiration or its exercise at which time the liabilities will be reclassified to equity. The debt discount associated with the initial value of the derivatives and warrants will be amortized to interest expense over the term of the Convertible Notes. |
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The estimated fair value of the Convertible Notes (categorized as a Level 2 liability for fair value measurement purposes) is determined using current market factors and our ability to obtain debt at comparable terms to those that are currently in place. We believe the estimated fair value at June 30, 2014 approximates the carrying amount. The valuation assumptions are based on a the Convertible Debenture face amount of $10.0 million, cash coupon rate of 6%, time to maturity of 2.8 years, and a yield bond rate of 30%. |
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Warrants and Derivative Liabilities |
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Our derivative liability and common stock warrant liabilities are considered Level 3 instruments under ASC 820, Fair Value Measurements. The following table sets forth a summary of the changes in the fair value of our financial instruments (in thousands): |
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| | Derivative | | Common | | Common | | | |
Liability | Stock Warrant | Stock Warrant | | |
Associated with | Liability | Liability | | |
Convertible | Associated with | Associated with | | |
Notes | Convertible Notes | Credit Facility | | |
Fair value as of December 31, 2013 | | $ | — | | $ | — | | $ | 528 | | | |
Fair value of financial instruments issued | | | 1,980 | | | 2,734 | | | — | | | |
Change in fair value | | | -1,042 | | | -1,280 | | | -302 | | | |
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Fair value as of June 30, 2014 | | $ | 938 | | $ | 1,454 | | $ | 226 | | | |
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We valued the warrant liability associated with the Credit Facility using the Black-Scholes-Merton option pricing model. Following is a summary of the key assumptions used to calculate the fair value of the Credit Facility Warrant: |
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| | | | | | | | | | Issuance | |
| | June 30, | | | December 31, | | | December 3, | |
| | 2014 | | | 2013 | | | 2013 | |
Stock Price | | $ | 0.57 | | | $ | 1.01 | | | $ | 1.18 | |
Risk-free interest rate | | | 1.6 | % | | | 1.8 | % | | | 1.4 | % |
Expected annual dividend yield | | | — | % | | | — | % | | | — | % |
Expected volatility | | | 73.9 | % | | | 73.6 | % | | | 74.2 | % |
Term (years) | | | 4.4 | | | | 4.9 | | | | 5 | |
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We used a Monte Carlo simulation analysis to value the warrant liability associated with the Convertible Notes by modeling scenarios associated with the possible “strike price” reset provision. For the embedded derivative related to the conversion feature, as there is a conversion price reset feature, we recognized that the possible values for the Convertible Notes were path-dependent, and thus also chose to use a Monte Carlo simulation analysis to value this derivative. |
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Following is a summary of the key assumptions used to value the warrant liability associated with the Convertible Warrants: |
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| | | | | | Issuance | | | | | |
| | June 30, | | | April 22, | | | | | |
| | 2014 | | | 2014 | | | | | |
Stock price | | $ | 0.57 | | | $ | 0.97 | | | | | |
Strike price | | | 1.19 | | | | 1.19 | | | | | |
Risk-free interest rate | | | 1.6 | % | | | 1.4 | % | | | | |
Expected annual dividend yield | | | — | % | | | — | % | | | | |
Expected volatility | | | 30 | % | | | 30 | % | | | | |
Term (years) | | | 4.8 | | | | 5 | | | | | |
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Following is a summary of the key assumptions used to value the embedded derivatives associated with the Convertible Notes: |
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| | June 30, | | | Issuance | | | | | |
April 22, | | | | |
| | 2014 | | | 2014 | | | | | |
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Principal outstanding | | $ | 9,994 | | | $ | 9,994 | | | | | |
Stock Price | | | 0.57 | | | $ | 0.97 | | | | | |
Risk-free interest rate | | | 0.88 | % | | | 0.93 | % | | | | |
Expected annual dividend yield | | | — | % | | | — | % | | | | |
Expected volatility | | | 72.7 | % | | | 71.6 | % | | | | |
Term (years) | | | 2.8 | | | | 3 | | | | | |
Conversion price | | $ | 1.06 | | | $ | 1.06 | | | | | |
Bond yield | | | 30 | % | | | 30 | % | | | | |
Coupon rate | | | 6 | % | | | 6.7 | % | | | | |
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